Competitive Environmental Analysis

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Competitive Environmental Analysis Introduction Any successful business organization would operate with a strategic management where vision and mission is defined. Vision and Mission of such an organization is formulated based on the environmental factors. In order to determine the environmental factors an analysis is undertaken. This analysis is could be termed as an environmental analysis. Environmental Analysis is one of the strategic planning techniques to scan or to evaluate the factors that are suitable and not suitable for an organization. The factors could be organization’s resource capabilities, relative cost position and competitive strength versus rivals.1 These strategic management tools serve an organization to illuminate its resource strengths and deficiencies, its market opportunities, the outside threats to its future profitability and its competitive standing relative to rivals.2 Concept of Environmental Analysis Environment means the surroundings, external objects, influences or circumstances under which someone or something exists. In other words, environment analysis is the process of identifying Opportunities and Threats facing in an organization for the purpose of strategic formulation. Environmental Analysis is also known as environmental scanning or appraisal.3 It is a process through which an organization or business firm comprehends different factors and examines the opportunities and threats that are provided by the environment of an organization. Features of environment •

Environment is Complex

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Environment is Dynamic

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Environment is Multifaceted

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Environment has a far reaching impact.

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Environment is difficult to control

Factors of Environmental Analysis 1

Thomason and Strickland, Strategic management- concepts and cases, 2001, p.115

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Ibid., p.115

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L M Prasad, Business Policy: Strategic Management, 2005, p.133

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Any business organization operates under two main factors: internal factors and external factors. A business organization being a system operates in some contexts which lie within its control is known as internal factor. The internal factors may be viewed as strengths or weaknesses depending upon their impact on the organization's objectives. What may represent strengths with respect to one objective may be weaknesses for another objective. The internal factors enable a business organization in the following areas:  It provides an organization with its capabilities to capitalize an opportunity for protecting

itself from threats present in the environment.  Determine distant competencies  What makes it unique  What are its capabilities in future, competent in specific areas. A business organization being a system operates in some environment which lie outside its control is known as external factors. This environment could be depicted in the following structure:

Environmental Scan

Environment al Scan

Internal Analysis   

Strengths

Political – Legal Factors

Weaknesses

External Analysis

Opportunitie s 

Threats

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Political factors include government regulations and legal issues and define both formal and informal rules under which the firm must operate. These are important factors particularly in a mixed economy like India and its affects the working of business organizations significantly.4 Some examples include: •

Tax policy

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Employment laws

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Environmental regulations

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Trade restrictions and tariffs

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Political stability

Economic Factors Economic factors affect the purchasing power of potential customers and the firm's cost of capital. Economic environment covers those factors which give shape and form to the development of economic activities and may include factors like nature of economic system, general economic conditions, various economic policies and various production factors.5 The following are examples of factors in the macro-economy: •

economic growth

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Interest rates

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Exchange rates

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Inflation rate

Social Factors Social factors include the demographic and cultural aspects of the external macro-environment. Social and cultural environment consists of attitudes, beliefs, desires, expectations, education and customs of the society at a given point of time.6 These factors affect customer needs and the size of potential markets. Some social factors include: • 4

Health consciousness

L M Prasad, Business Policy: Strategic Management, 2005, p.144

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L M Prasad, Business Policy: Strategic Management, 2005, p.142

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L M Prasad, Business Policy: Strategic Management, 2005, p.147

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Population growth rate

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Age distribution

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Career attitudes

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Emphasis on safety

Technological Factors Technological factors can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions. These may include inventions and techniques which affect the ways of doing things that is designing, producing and distributing products. 7 Some technological factors include: •

R&D activity

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Automation

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Technology incentives

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Rate of technological change

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External Opportunities and Threats

Role of Environmental Analysis This analysis plays a vital role in the strategic management of an organization. Ian Wilson has compared the role of environmental analysis with the function of a radar.8 According to him, if a ship is sailing on a sea of uncertainty, there are two essential requirements for a successful voyage. There has to be a star to steer the ship. Secondly, there must be a radar to signal the existence of rock, reefs and clear water in the uncharted sea. Similarly, an organization operating in an uncertain environment must have a vision of the business (a guiding star) and a system of environmental analysis (the radar). The research studies show that organizations which undertake constant environmental analysis perform better in their business. Therefore, this analysis helps the management to formulate business strategies.

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L M Prasad, Business Policy: Strategic Management, 2005, p.146

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Ian Wilson, Benefits of Environmental Analysis in Kenneth J Albert (ed.), The strategic management handbook New York: MacGraw Hill, 1993, pp.9.6 -9.7

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Purpose Environmental Analysis The environmental appraisal or scanning is necessary because the business environment constantly changing. Therefore, it has be closely monitored and analysed. There are various factors which are analysed to determine the conditions of opportunities and threats, factors of external environment, events, trends, issues and expectations. This analysis could be made using SWOT analysis to identify the key internal and external factors that are important in achieving the vision and mission. This analysis involves two main aspects. They are monitoring the environment and identifying the opportunities and threats based on the environmental monitoring. The usefulness of SWOT analysis is not limited to profit-seeking organizations. SWOT analysis may be used in any decision-making situation when a desired end-state (objective) has been defined. Examples include: non-profit organizations, governmental units, and individuals. SWOT analysis may also be used in pre-crisis planning and preventive crisis management. SWOT analysis may also be used in creating a recommendation during a viability study. SWOT Analysis - Meaning It is also a scan of the internal and external environment and an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT (sometimes referred to as TOWS) analysis. Genesis of SWOT9 SWOT analysis is a simple framework for generating strategic alternatives from a situation analysis. It is applicable to either the corporate level or the business unit level and frequently appears in marketing plans. The SWOT framework was described in the late 1960's by Edmund P. Learned, C. Roland Christiansen, Kenneth Andrews, and William D. Guth in Business Policy, Text and Cases (Homewood, IL: Irwin, 1969). The General Electric Growth Council used this form of analysis in the 1980's. Because it concentrates on the issues that potentially have the most impact, the SWOT analysis is useful when a very limited amount of time is available to address a complex strategic situation.10

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www.NetMBA.com/Strategic Management/SWOT Analysis www.hubpages.com/hub/SWOTanalysis

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The SWOT analysis provides information that is helpful in matching the firm's resources and capabilities to the competitive environment in which it operates. It is otherwise described as opportunity/issue analysis; this is a widely used tool for situation audit. It encourages managers to summarize the position in terms of: Strengths, Weaknesses, Opportunities and Threats.11 Strengths A firm's strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage over its competitors.12 It is an inherent capacity that is in relation to the environment. For an organization to be a success it requires strength and it gives strategic advantage to gain more than the competition. Examples of such strengths include: 1. patents 2. strong brand names 3. good reputation among customers 4. cost advantages from proprietary know-how 5. exclusive access to high grade natural resources 6. favorable access to distribution networks Weaknesses The absence of certain strengths may be viewed as a weakness. It is an inherent limitation or constraint of the organization which creates strategic disadvantage to it.13 It leads to competition where weakness can be used to gain more due to inherent limitation / constraint/inadequacy. For example, each of the following may be considered weaknesses:  lack of patent protection  a weak brand name  poor reputation among customers  high cost structure  lack of access to the best natural resources 11

Jennifer Rowley, Information Marketing (2nd edition), Ashgate Publishing Ltd., Power House, England, 1988, p. 208 12

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L M Prasad, Business Policy: Strategic Management, 2005, p.133 L M Prasad, Business Policy: Strategic Management, 2005, p.133

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 lack of access to key distribution channels In some cases, a weakness may be the flip side of a strength. Take the case in which a firm has a large amount of manufacturing capacity. While this capacity may be considered a strength that competitors do not share, it also may be a considered a weakness if the large investment in manufacturing capacity prevents the firm from reacting quickly to changes in the strategic environment. Opportunities The external environmental analysis may reveal certain new opportunities for profit and growth. OPPORTUNITY can be accomplished and can help to consolidate and strengthen the organization. It’s a favorable condition in the organization’s environment which enables it to strengthen its position.14 Some examples of such opportunities include: 1. an unfulfilled customer need 2. arrival of new technologies 3. loosening of regulations 4. removal of international trade barriers Threats Changes in the external environmental also may present threats to the firm. Also when the opportunities are not utilized properly it can cause problem to the organization which causes threat. It is unfavorable condition in the organization’s environment which causes a risk/damage to an organization’s position.15 Some examples of such threats include:  shifts in consumer tastes away from the firm's products  emergence of substitute products  new regulations  increased trade barriers

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L M Prasad, Business Policy: Strategic Management, 2005, p.133

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L M Prasad, Business Policy: Strategic Management, 2005, p.133

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Limitations of SWOT Analysis SWOT analysis may tend to persuade business organizations to compile lists rather than think about what is actually important in achieving objectives. It also presents the resulting lists uncritically and without clear prioritization so that, for example, weak opportunities may appear to balance strong threats. Conclusion Environmental analysis or scanning enables a business organization to formulate strategies conducive to the given environment. Therefore, an organization has to find out the relevant environment which directly affects it. SWOT analysis is one of the tools used to determine the desired environment.

BIBLIOGRAPHY 1. Arthur A Thomason Jr. and A J Strickland III, Strategic management- concepts and cases (12th edition) New Delhi: Tata McGraw-Hill Publishing Company Limited, , 2001 2. Ian Wilson, Benefits of Environmental Analysis in Kenneth J Albert (ed.), The strategic management handbook, New York: McGraw Hill, 1993

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3. Jennifer Rowley, Information Marketing (2nd edition), England: Ashgate Publishing Ltd., Power House, 1988 4. L M Prasad, Business Policy: Strategic Management, New Delhi: Sultan Chand & Sons, Educational Publishers, 2005 5. www.NetMBA.com/Strategic Management/SWOT Analysis 6. www.hubpages.com/hub/SWOTanalysis

Competitive Environmental Analysis An assignment

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submitted in partial fulfillment of the requirement for the first CIA component in Strategic Management Studies

Submitted to Dr John G, M.Com, MPhil, PhD

By Gerald Ravi D’Souza (08PCO125) M.Com - II

Department of Commerce St. Joseph’s College (Autonomous) Tiruchirappalli – 620 002 December 2, 2009

Seminar on Competitive Environmental Analysis

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Using the SWOT Analysis method Gerald Ravi D’Souza 08PCO125